Continue reading James Simons: Legendary hedge fund pro calls it quits

James Simons: Legendary hedge fund pro calls it quits originally appeared on BloggingStocks on Fri, 09 Oct 2009 10:30:00 EST. Please see our terms for use of feeds.

On Monday, the stock market rose 498 points -- a move that many attributed to the announcement over the weekend of a plan to buy $1 trillion in toxic waste that uses government loans to lure investors -- such as hedge funds -- into buying extremely risky securities.

That sounds like the same thing that got us into the financial crisis in the first place. It also sounds like the sort of thing that hedge funds do for a living -- and those hedge funds are making a handful of skilled people into billionaires.

Continue reading Will $1 trillion toxic waste plan enrich hedge fund billionaires?

Will $1 trillion toxic waste plan enrich hedge fund billionaires? originally appeared on BloggingStocks on Wed, 25 Mar 2009 13:20:00 EST. Please see our terms for use of feeds.

Ever since the $50 billion Madoff Securities Ponzi scheme came to light, I have been wondering whether there are others out there that have yet to be discovered. While the facts of how Madoff was able to keep his scheme going remain elusive, it appears that a recent $7 billion cash call made it clear that he did not have enough cash on hand. If Madoff was indeed a Ponzi scheme, he would have needed to raise $7 billion from new investors to meet those redemption requests -- since he could not raise that much new money he folded his hand.

It is hard to believe that Madoff is the only scam artist out there. Why was Madoff able to pull it off for so long? Are there other funds with similar characteristics? Is James Simons' $35.4 billion (October 2007 assets under management) Renaissance Technologies such a fund? The answer to the last question is that it's possible but unlikely.

Since enough is not yet known about where Madoff's money came from and where it went, we don't know how he pulled it off. But, as I posted, there are four key elements that probably contributed:

• Unrealistically steady returns that others could not duplicate. Madoff reported 1% a month returns through a split conversion strategy that others could not duplicate but that investors wanted to believe was real;
• Lack of independent auditing. Madoff had a three-person audit firm -- one of whose members was a 78-year- old living in Florida;

Continue reading Could James Simons be the next Bernie Madoff?

Could James Simons be the next Bernie Madoff? originally appeared on BloggingStocks on Sun, 21 Dec 2008 10:05:00 EST. Please see our terms for use of feeds.

This week a little story about a $50 billion investment fraud has metastasized. Madoff Securities, a brokerage firm that ran a secretive investment fund on the side, has closed down -- revealing that its steady 10% annual returns was a result of a Ponzi scheme. For some who trusted Madoff a week ago, they are today coming to grips with life without money. Is Madoff the only one out there? I doubt it. So you need to protect yourself.

How did Madoff accomplish this? That story has yet to be revealed. But founder Bernie Madoff revealed that he was using money from his most recent investors to pay off the earlier ones who requested their money. And a letter from hedge fund research and advisory firm, Aksia -- which steered its clients away from Madoff -- reveals five useful clues:

• Unknown accounting firm. Madoff used an accounting firm Friehling & Horowitz that employed three people -- one was a 78 year old living in Florida.
• Incomprehensible investment strategy too good to be true. Madoff employed a "split conversion strategy" which was never clearly defined and whose returns other traders could not duplicate.
• Deception about technology. Madoff claimed it was technologically sophisticated but a visitor to its offices found paper tickets sent through the mail.

Continue reading $50 billion investment fraud: Could you be next?

$50 billion investment fraud: Could you be next? originally appeared on BloggingStocks on Sat, 13 Dec 2008 08:41:00 EST. Please see our terms for use of feeds.

The winners for 2008 (at least through September) are run by James Simons (a math genius whose money-making techniques elude explanation) and John Paulson (who made so much money last year shorting subprime). Here are the details:

• Medallion Fund, run by Simons' Renaissance Technologies LLC, has $8 billion in assets and gained more than 58% -- or $1.43 billion in profits; and
• Advantage Plus fund, Paulson's $13 billion investor in takeovers, restructurings and other corporate events, returned 24.6% through September.

Meanwhile, investors are scrambling for the exit for the typical hedge fund, withdrawing $87.5 billion. Total industry assets fell 11% from the peak of $1.93 trillion in the second quarter of 2008 to $1.72 trillion at the end of the third. Hedge fund closures by the middle of 2008 were 15% ahead of 2007. And that may be only the beginning for the world's 10,000 funds.

Isn't capitalism great?

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

With hedge funds down 10.8%, two big winners up 58%, 24.6% originally appeared on BloggingStocks on Tue, 02 Dec 2008 15:25:00 EST. Please see our terms for use of feeds.

James Simons is the richest math teacher you've never heard of. Last year he earned $1.7 billion (a fact that was reported in the media in 2007) as head of Renaissance Technologies, a hedge fund compound from which he takes enormous fees.

How enormous? Simons earns 5% of assets under management and 44% of profits. Typical hedge funds managers earn 2% management fees and 20% of the profits. How does Simons justify the fees? He beats the competition regularly. In 2006, his $6 billion Medallion fund posted gross returns of 84%; 44% after fees.

Simons's annual pay checks have been adding up nicely for him. His net worth was recently estimated at $5.5 billion. Not bad for a math teacher.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.

Be sure to check out more Money Winners of 2007.

Money Winners of 2007: Renaissance Technology's James Simons originally appeared on BloggingStocks on Sun, 16 Dec 2007 13:40:00 EST. Please see our terms for use of feeds.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements.

Hedge fund Renaissance Technologies - looking to sell out? originally appeared on BloggingStocks on Tue, 28 Aug 2007 15:45:00 EST. Please see our terms for use of feeds.

Barron's [subscription required] revealed some scary statistics about this week's carnage. The smartest of the smart are finding that their computer models are telling them to do the wrong things at the moment of maximum peril. As a result, The Goldman Sachs Group's (NYSE: GS) $8 billion Global Alpha hedge fund is down 26% so far this year and the $26 billion Renaissance Institutional Equities Fund -- run by the $1.7 billion (2006 compensation) man, James Simons -- has fallen 8.7% so far this month.

What is going on? The computer models that run these funds don't model what is happening now -- a simultaneous dash to liquidate by all their peers. Statistical factor-based quantitative models -- which weight dozens of valuation, growth, and momentum variables to create long/short portfolios -- have attracted many competitors.

Their models broke in recent weeks as volatility surged, leverage was cut back, heavily shorted stocks went up and statistically cheaper shares cracked. One anonymous manager said "There is this unknown risk, when there are enough people doing what you do, that when some of them have to unwind and they start unwinding -- you are just going to get crushed. And that's not in the model anywhere."

Continue reading Quantitative hedge funds take their hits

Quantitative hedge funds take their hits originally appeared on BloggingStocks on Sat, 11 Aug 2007 08:30:00 EST. Please see our terms for use of feeds.

Wow! That was my initial reaction when I read the Bloomberg News story about the pay accruing to Blackstone Group's top executives. And yet, compared to hedge funds, these guys are lightweights. When you look at their photos, though, you can only come to one conclusion -- it pays to be bald!

Blackstone Group LP co-founders Stephen Schwarzman and Peter G. Peterson will get $2.33 billion and keep 28% of the company after its planned initial public offering. That was interesting but what really got my attention is their pay -- Schwarzman made $398.3 million last year and will own Blackstone shares worth $7.7 billion while Peterson took in $212.9 million in 2006 and will own $1.31 billion worth of stock after the deal is done.

This seems like a nice payday but it depends on whose you compare it to. Schwarzman's pay is about 7.4 times that of Goldman Sachs Group Inc.'s (NYSE: GS) CEO Lloyd Blankfein -- who made only $54 million in 2006 and 6,638 times that of the average U.S. family which pulled in $60,000 last year.

Yet Schwarzman's $398 million is less than a quarter of the $1.7 billion that top hedge fund manager, James Simons, pulled in last year. Do you feel sorry for Schwarzman now?

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Goldman Sachs.

Blackstone's billionaire baldie battles for booty originally appeared on BloggingStocks on Mon, 11 Jun 2007 13:55:00 EST. Please see our terms for use of feeds.

A few months ago a doctor asked me why hedge fund managers make more money than he and his colleagues. After all, Doctor, when used before a name, is capitalized, while hedge fund manager isn't. While I'm joking about the capitalization -- it does reflect the much greater level of societal acclamation doctors receive from the moment they set their minds on an MD to their obituaries. So why doesn't societal acclamation translate into money?

Before trying to answer this question, it's worth noting that I just spent some time trying to find a list of the highest paid doctors -- but I failed. I found one list which said surgeons make an average of $247,536-- and a 1999 survey suggesting that neuro-surgeons make $500,000. But hedge fund managers do get ranked by income, as this New York Times article (registration required) points out.

My post on top-ranked James Simons (2006 income: $1.7 billion), suggested hedge fund managers out-earn doctors because top performing hedgies can leverage their time more efficiently. That is -- while a hedge fund manager can take on an additional $1 billion under management without adding a huge number of additional analysts, if a doctor takes on many more patients, he or she will need to hire a proportionately larger number of doctors to treat them. Most hedge fund managers let computers do much of the work -- something doctors can't do.

Continue reading Why hedge fund managers outearn doctors

Why hedge fund managers outearn doctors originally appeared on BloggingStocks on Wed, 23 May 2007 16:55:00 EST. Please see our terms for use of feeds.

The most highly paid hedge fund manager made $1.7 billion in 2006, according to the New York Times. That's 28,333 times more than the roughly $60,000 that the median U.S. family made in 2006.

Hedge funds are a good business to be in if you can attract lots of capital and earn high returns from investing it. That's because hedge fund managers take 2% of the assets under management as an annual fee. And they earn 20% of the profits they make for their investors. James Simons, the 69-year-old former math professor, who pulled in $1.7 billion, uses complex computer-driven mathematical models to make bets on stocks, bonds and commodities at his fund Renaissance Technologies. Simons fee is 5% of assets under management and 44% of profits. But he beats the competition regularly. In 2006, the $6 billion Medallion fund posted gross returns of 84%; 44% after fees.

A doctor asked me why, if he was such as hot shot, these money people made so much more than he did. The answer is fairly simple. Doctors get paid on a per patient basis. No matter how many patients the doctors take on, there are only seven days a week and 24 hours in a day. And if a doctor takes some time off from work, that further limits the available hours. And the pay for many of the procedures doctors perform is limited by government regulations.

Ours is a society that rewards making money. And hedge fund and private equity managers make more of it for their investors than anyone else. As they love to say, if you pay peanuts, you get monkeys.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.

Leading hedge fund manager makes 28,333 times the median family income originally appeared on BloggingStocks on Tue, 24 Apr 2007 11:25:00 EST. Please see our terms for use of feeds.